The math doesn’t add up on the US’s ambitions to export natural gas

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Obsession

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Written by

Obsession

Over the years, the US natural gas industry built a dozen terminals to import liquefied natural gas for fuel-hungry Americans, and until recently also had plans for 11 new and expanded LNG import terminals. None of them is currently in use—the US, awash in its own gas, requires none from anywhere else. In fact, the US has so much gas that, if the industry has its way, those existing terminals and some of the proposed ones—16 in all—will be converted into export facilities in the coming years.

Yet, to the degree they are approved by the Obama Administration, none is likely to get much if any use either, according to a new report.

The report, researched for the US Energy Department by a private consultant, concludes that—even though US gas is currently less than a fifth the price of LNG sold in Asia—economics are likely to keep US gas largely bottled up at home. It simply costs too much to get it processed and transported that distance.

The report is important because it was commissioned by the Obama Administration to help decide whether to allow LNG exports to nations with which the US doesn’t have free-trade accords, such as Japan—the world’s biggest LNG importer—and China. The consensus is that the Administration will grant at least some of the permits, but there is much push-back by politicians and businesses who say the US could end up squandering the advantage offered by ultra-cheap natural gas.

Yet even if the Administration throws caution to the wind and approves everyone, the stars will have to align to trigger any significant export traffic, the DOE report suggests. Look at the math.

The current natural gas futures price for December 2017, when the first export terminals can feasibly be up and running, is $4.90 per 1,000 cubic feet. So let’s use that as a price assumption. That gas has to be moved to a liquefaction plant, which adds $1 per 1,000 cubic feet, according to the DOE report. Liquefaction itself adds $2.14. Then it has to be shipped to, say, China, which adds another $2.87. Once there, it has to be converted back into gas, for another 88 cents. Then that gas has to be piped to its end user, for another $1.50.

In total, you get $13.29 per 1,000 cubic feet, which is far from the low US price (currently $3.63 per 1,000 cubic feet) that everyone on the Asian side is thinking of when they cry out for access to the US market.

But how about the US drillers, who are the ones applying for export licenses? Right now in Asia, long-term LNG contracts fetch upwards of $18 per 1,000 cubic feet; $4 or so profit per 1,000 cubic feet is pretty good. But, if faced with competition from US exports, lower-cost drillers in Qatar and elsewhere are likely to undercut the American interlopers by shrinking their profit margins. That is why the DOE report concludes that, under current status quo projections, there will be “no US LNG exports.”

What you would need to get exports going will be much higher foreign demand—for example, if Japan really does shut down its entire nuclear power industry in 2040, as it says it will. That is not impossible, but seems unlikely. The Japanese way of life is likely to be too disrupted.

So why are US gas producers lining up and lobbying for export permits if they are unlikely to export much if any gas?

“It’s a lot cheaper to file for a permit than to build a plant,” Michael Levi of the Council on Foreign Relations, told me. “Particularly in an environment where people think there might be an export quota, everyone is going to get into line, and you inflate the number of applications.”